The shock of Britain’s vote to leave European Union has German carmakers scrambling. Not only is Britain their number one export market. Last year, British buyers spent €22 billion on over 800,000 BMWs, Mercedes, Volkswagens and other German cars. What’s more, Britain is also deeply embedded in the German automakers’ complex supply chains. The car companies and their German suppliers operate more than 100 factories in Britain. No two European countries’ auto industries have closer links.
All these investments were of course predicated on Britain being part of the EU’s single market where goods flow fast and freely, without tariffs, border checks or customs declarations. Now, there is a very real danger that Britain will lose its unfettered access to Europe’s mainland – and Europe to Britain. Carmakers are therefore working fast on Plan B. Already, auto industry analysts have lowered their forecasts for German car sales in Britain, mainly because a nearly 10 percent post-Brexit plunge of the British pound against the euro means fewer Brits will be able to afford German cars. If trade barriers go back up, as some analysts say is now likely to happen, the changes would be much more wrenching. BMW, which ships the iconic Mini from its factory in Oxford to all of mainland Europe, may have to shift production to a plant in the Netherlands. Opel could make more Astras at its Gliwice plant in Poland instead of Liverpool. The suppliers and their factories would of course follow suit.
Brexit has not only created a political earthquake, with Europe’s populists empowered all around. The economic tremors are just as powerful, and reach far beyond Britain’s borders. Because of its close ties and tremendous dependence on exports, Germany will likely be the one country other than Britain to feel the greatest pain. Companies from pharma to banking are already anticipating losses. Deutsche Bank, which does almost one-fifth of its business in London, saw its stock fall to a 30-year low following the vote, with analysts predicting Brexit-related losses for the lender.
“Brexit is bad news for Germany’s economy,” says Erik Schweitzer, head of the German Chambers of Industry and Commerce (DIHK). Just days after the vote, Schweitzer’s organization did a flash poll of 5,600 German companies. A majority worried about declining exports, and a quarter already envisioned cuts to jobs and investments. The DIHK predicts a fall in German exports to Britain – now valued at €90 billion – of 1 percent this year, followed by a plunge of 5 percent in 2017. These numbers are not negligible: If the German economy doesn’t find a way to make up those exports, the 2017 decline would cut German GDP by some 0.2 percent.
But the real threat to the well-oiled export machine that is the German economic juggernaut doesn’t come from Brexit alone. It’s what could come next. In an age of uncertainty and populism, the idea that countries can wall themselves off against the effects of globalization is gaining new currency. The British vote to divorce the EU was driven by a fear of open borders, and by the discontent of the underprivileged toward the prevailing economic order. All across Europe, the vote has emboldened anti-EU populists like France’s Marine Le Pen, who want their countries, too, to sever ties with the EU. Then there are regional secessionist movements in Catalonia and Scotland, which could be reenergized and splinter the single market even more. Their roots and ambitions differ, but these populist movements share the promise of autarky, the much-disproven but strangely attractive illusion that countries can be better off if they wall themselves off against the global competition.
Germany is a highly competitive, extremely efficient export machine, but access to foreign markets is its Achilles heel. With almost half of its GDP earned through exports, the German economy is dependent on free trade like no other major economy – not even China (22 percent) and Japan (18 percent) come close. Of those German exports, 7.5 percent go to Britain alone. Other countries might be able to afford a backlash against global trade. Germany, with its current economic model, cannot.
Even before Brexit, the tide against trade had already turned. Since the Western financial crisis in 2009, trade restrictions have multiplied as countries struggle with recessions, job losses and voter discontent that often focuses on trade. Since 2009, the top 20 global economies have introduced over 1,200 new trade barriers, the World Trade Organization warned in June. The number of new discriminatory barriers jumped 50 percent in 2015 alone, according to the WTO’s Global Trade Alert. Ranging from local content requirements to national security laws that favor domestic companies, the effect is to exclude competition from abroad. The new restrictions “really have a significant effect on German companies, making it harder for them to access new markets,” says DIHK trade specialist Volker Trier. “It reduces their market share.”
If the 50 years following World War II saw the establishment not just of the EU, but of the entire global economic order on which German prosperity depends, that order is now under siege. Two new trade agreements, between Europe and the U.S. as well as Europe and Canada, may now never be passed. Shaped to ease market access and create jobs, the two agreements are fiercely opposed by critics throughout Europe who fear the erosion of social and environmental standards. Immediately after the Brexit vote, leading politicians in Paris and Berlin came out against those agreements. The tide is also turning in the United States, where Republican presidential candidate Donald Trump called for the country to withdraw from NAFTA, slap a 45 percent tariff on all trade with China, and charge 35 percent duty on every car imported to the U.S. from Ford’s factories in Mexico. But Ford isn’t the only carmaker shipping cars from Mexico north of the border. Volkswagen does as well.
That’s the stuff of trade war. Trump-style populism could spark a dangerous spiral of protectionism with “disastrous” effects on the global economy, IMF chief Christine Lagarde warned in July. With Germany exporting a whopping €114 billion of merchandise to the U.S. in 2015 (the U.S. is the number one buyer of German goods), there is little reason to assume German products will always be safe when the anti-trade forces gather. Even if a President Trump (or similar candidates in the future) were to leave trade with Germany alone, a China and Mexico driven into recession by closed U.S. borders would also hit German exporters hard.
In fact, any recession in one of its key export markets can turn into a liability for German exporters. “Germany is addicted to exports but the world is stagnant,” says George Friedman, founder of the advisory group Geopolitical Futures. He says it’s not just populists who are raising questions about the entire structure of internationalism created after World War II, including the EU, and asking if that structure is still working. Once the next recession hits – as it always will – harder economic times will only embolden the opponents of free trade.
In Germany’s executive suites, the mood over Brexit is nervous, but many disagree that their country is at any great risk. German companies’ products are in high demand, sales to non-EU countries like China are growing, and the nation’s highly flexible exporters have survived many global crises before. Perhaps that’s one reason why so few politicians are willing to beat the drum for free trade and new trade agreements. On the contrary: With the 2017 election approaching, Social Democrats like Economics Minister Sigmar Gabriel seem to be dialing back their support for trade deals, eyeing polling figures that show widespread unease among voters about the new agreement with the United States.
German politicians are also working to save what’s left of the EU, especially the single market. Finance Minister Wolfgang Schäuble and Foreign Minister Frank-Walter Steinmeier have recently suggested that further EU integration is no longer the goal, and a more à-la-carte Europe is in the offing. That could be a smart way to give countries more wiggling room while preserving the free-trade bloc. Germany’s special vulnerability to a nasty divorce between Europe and the UK may also be one reason why Chancellor Angela Merkel has been so patient with the British. Unlike leaders in Paris and Brussels, who demanded Britain be punished with harsh terms for leaving the EU, Merkel has pleaded for tempers to cool, declaring there’s no reason to be nasty.
Germany's economy is a well-oiled machine, but its Achilles heel is access to foreign markets.
Still, business representatives such as the DIHK’s Trier want Germany’s politicians to play a much more active role to protect free trade worldwide. Carsten Bzerski, chief economist of ING-DiBa bank, fears that German politicians are much too complacent when it comes to Germany’s vulnerability to the global economy, and to an anti-trade backlash. “There’s still this feeling that nothing can harm the German economy, this feeling of superiority,” he says. He compares the German economic model to soccer: “It’s like banking on one striker, like Thomas Müller, and suddenly he stops scoring goals. If you continue banking on exports, that’s a risky strategy.”
Part of Germany’s strategy seems to lie outside the global system for trade. Because much of the growth in German exports has come from developing countries like China and Brazil, Berlin has been pushing one-on-one deals and export diplomacy. The ink wasn’t even dry on the nuclear accord with Iran when a high-level trade delegation made a bee line for Tehran. Berlin continues to develop its ties with China. A vocal minority of business leaders is pushing Merkel to scrap the sanctions on Russia. For all that bilateral relations are good, there are problems with this strategy, says the DIHK’s Trier. “An agreement with China can’t replace the Transatlantic trade agreement,” he says. “We still need free-trade agreements.” Second, while one-on-one relationships may help Germany, they risk further undermining the global rules-based order from which Germany so greatly profits.
What’s the alternative, besides pushing for trade access with Britain and the rest of the world to remain intact? Timo Klein, an economist at IHS Markit, says it will be key to invest in better education for those on the losing end of globalization and to distribute the gains. Some economists even say it’s time to nudge the German economic model in a different direction, where it will be less dependent on exports.
Meanwhile, companies are trying to stay calm and limit the damage. Siemens, the Munich-based engineering conglomerate that has substantial operations in Britain, hopes that negotiations between the two sides will keep Britain closely aligned with mainland Europe. “Obviously, the closer we get to free trade, the better,” says Jürgen Maier, head of Siemens UK. That’s a sentiment every German CEO will share.
Allison Williams is deputy editor in chief of Handelsblatt Global Edition and reported this article. It was written by Stefan Theil, the managing editor of Handelsblatt Global Edition Magazine. To contact the authors: email@example.com, firstname.lastname@example.org